Anite interims

Anite is a global provider of hardware and software solutions, systems integration and managed services within its core markets of Wireless and Travel. I have a holding in my growth portfolio (epic code: AIE).

 

Anite released their interim results today and were in line with the trading update in October, commented on here.

Group revenue fell by 6% to £57.5m due to a 21% reduction in Handset Testing revenue.  Like-for-like revenue declined by 17% for the group due to a 33% decline in Handset Testing if we exclude the Propism acquisition.

With the Handset Testing just breaking even in the period the Group adjusted operating profit declining 63% to £5.3m. 

Adjusted profit before tax was £5.1m down from £14.3m last year and adjusted diluted EPS reduced 65% to 1.2p and statutory diluted EPS reduced from 27p to 0.2p.

Despite the lower earnings, free cash flow (FCF) was £3.8m compared to £3.5m last year.  The FCF generated was spent on - acquisitions £1.8m, dividends £3.6m and purchase of own shares for an employee trust £3.4m, resulting in net debt of £6m compared to £0.9m at the start of the year.

The interim dividend has been maintained at 0.575p as management state that "...despite the reduction in year on year profitability... the Board believes that trading in the first half of the year reflected temporary market conditions..."

Looking at sales and orders in more detail, there was some positive news as can be seem from the table below and with the book to bill ratio above 1 for the Handset Testing division this possibly marks a turning point in its fortunes.

Click on table to enlarge

 





 

Management believe that with a tenfold increase in mobile traffic between 2013 and 2019 (see Ericsson mobility report here) there will be no let-up in cellular network overload and this will drive the need for continued technology innovation in handsets and therefore the testing that they require from the Handset Testing division.

Mangement expect that the roll-out of LTE 4G networks will continue to benefit the Network Testing business in the second half and over the next few years.

The Travel business has a £75.2m order book and this is expected to be mined over the next 5-10 years.  The long term prospects for continued growth will be dependent on the ability to land new and renew existing maintenance contracts.

My expectations for the full year are unchanged from my previous estimates here that produced full year underlying EPS of 4.9p.  

 

             

Tesco 3rd qtr IMS

One of the world’s largest retailers.  I have a holding in my income portfolio (epic code: TSCO)

Tesco issued their 3rd Qtr IMS today and the sales information was in line with expectations, but did not make comfortable reading.  Like-for-like sales were down in all retail areas, UK was down 1.4%, Europe down 4.0% and Asia down 5.1% (these sales exclude petrol, but include VAT).  Sales at Tesco Bank increased by 0.9%.

Overall sales declined by 0.8% and management stated that "...Despite the challenging conditions in many of our markets, we are performing in line with market expectations for the full year..."

Consensus market expectations for the full year are:

Sales £65,085m (range: £64,064-66,186)

PBT £3,217m (range: £2,805m-3,355) statutory

EPS 30.99p (range: 29.55-32.51p) underlying

Div 14.78p (range: 14-15.5p)

I would be inclined to pitch my own expectations at the low end of the range, with the possible exception of the dividend, that I think management would be loath to cut from last year's 14.8p given the earnings cover and pressure from institutional investors.

It was always going to be a long haul returning Tesco to some sort of growth, it remains to be seen whether Clarke will be given the time to achieve this.

Pearson acquisition

An international media and education company, providing educational materials, technologies, assessments and related services to teachers and students.  Owner of The Financial Times and part owner (47%) of Penguin Random House.  I have a holding in my income portfolio (epic code: PSON).

Coming fast on the heels of their disposal of Mergermarket, commented on here, today Pearson announced the acquisition of Grupo Multi, the leading adult English Language Training company in Brazil.

They will acquire Grupo Multi for approximately £440m (R$1.7bn) in cash and the assumption of £65m (R$0.25bn) of debt. In 2012, Grupo Multi generated operating profits of £42m (R$130m), so an EV/EBIT valuation of 15x in the local currency.

Pearson is paying a full price for what is the largest provider of private language schools in Brazil, they serve over 800,000 students across more than 2,600 franchised schools.  Brazil is one of the world's largest English Language Learning markets with the English Language Training market estimated to be worth £2bn (R$7bn), hence the price.

So Pearson are losing £25m EBIT from the Mergermarket disposal and replacing it with £33.7m EBIT (at today's exchange rates) from the acquisition of Grupo Multi for a net outlay of £123m (£505m for Grupo Multi less £382m from Mergermarket), in addition to greater exposure to a fast growing emerging market. 

 

Pearson disposal

An international media and education company, providing educational materials, technologies, assessments and related services to teachers and students.  Owner of The Financial Times and part owner (47%) of Penguin Random House.  I have a holding in my income portfolio (epic code: PSON).

Today Pearson announced that they have agreed the sale of The Mergermarket Group to funds advised by BC Partners for an enterprise value of £382m, payable in cash; this values the business at 15x operating income.

Mergermarket was acquired by Pearson back in 2006 for £101m plus a subsequent earn-out; revenues for the period to 31 December 2012 were £100m with operating income of £25m and profit before tax of £23m.

This is part of Pearson's strategy to focus on global education through digital technologies.  This will again raise questions as to the future of the Financial Times within the Pearson Group.

 

Compass Group finals

Provides contract food, catering and support services to a wide range of commercial businesses and government departments operating in over 50 countries.  I have a holding in my income portfolio (epic code: CPG).

Compass Group announced their full year numbers yesterday and underlying results were as indicated in their trading statement, commented on here, on 26 September 2013.

Briefly - revenue grew by 3.9% to £17,557m and 4.3% on an organic basis.  Underlying operating margins improved by 20 bps to a record 7.1% and underlying pre-tax profits grew by 9.2% to £1,188m.

Underlying EPS grew 12.5% to 47.7p and a final dividend of 16p was proposed - an increase of 13.5%, bringing the full year dividend to 24p up 12.7%.  

On the surface, this looks to be a good set of results, but there were some weak areas:

Although underlying EPS grew by 12.5%, reported EPS declined 26.6% to 23.4p, due mainly to a £377m goodwill impairment charge.  This is an increase on goodwill impairment, relating to the Granada merger in 2001, as a result of increases in the UK gilt yield that is part of the calculation in valuing expected cash flows from a business unit.  Put simply too high a price was paid by Compass in merging with Granada back then and, future profits and hence the net book value of the company are depleted. 

Europe & Japan continue to suffer and revenue fell by 3% on an organic basis to £6,039m, this had the effect of decreasing profits by £60m although this was offset by productivity improvements that produced a 60bps increase in operating margins.  Consequently operating profits from this division increased by £23m to £420m, this must be considered a good outcome in difficult markets.

The largest region North America continues to perform well and grew revenue on an organic basis by 8% to £8,150m, while improving operating margins by 10bps; all of which had the effect of increasing operating profits by £59m to £657m.

The Fast Growing & Emerging regions grew revenue organically by 10.2% to £3,368m, although operating margins fell by 30bps due to exiting some non-core contracts and implementing a new regional management structure, so operating profits increased by just £7m to £242m.

Financially Compass is in a strong position, net debt is just 0.8 of EBITDA and operating cash flow is  89% of net debt.  Free cash flow (FCF) was £681m for the year, similar to last year and gearing just 45%, with interest covered over 10 times.  Compass returned 19% on their average capital employed in the business a good margin over my estimate of their WACC of 8.3%.

Owners' earnings (dividends plus growth in NBV) have increased by a CAGR of 16% over the past 5 years and FCF has returned 19.5% over the same period. 

The increase in the dividend was by my reckoning the 12th successive year and has grown by a CAGR over that period of 12.7% pa.  This is an impressive record, more so since recent increases have not faltered, with the full year dividend for the period just ended having doubled over 5 years.  For those that are concerned with the 0.98 dividend cover from earnings for this year, dividends declared over the last three years have represented 63% of FCF (covered 1.6x), as FCF can move around from one year to the next, it is more meaningful to view it over an extended period such as three years.  This is both generous to shareholders, but comfortable for the company. 

At today's closing price of 922p Compass is fully valued at 17.9x this year's expected earnings and with a forward yield of 2.77% offers a below average income.  Some may argue that with these growth rates in the pay-out this may be a price worth paying, but there is little in the way of a margin for safety and remember it will take almost 5 years to catch up and replace the lost alternative dividend with say a 4% yielding stock with little or no growth.  Although having stated that, I currently have no intention of selling, but would not add to my position with any spare funds.

On a discounted cash flow basis I have calculated an intrinsic value of 925p per share for Compass.  This assumes that this year's FCF grows by 10% pa for the next 10 years, in perpetuity for 2.5% pa and I have used a cost of equity of 9.8% as the discount rate.

This note would not be complete without some comment on the new share repurchase plan announced of £500m, this follows on from two previous repurchase plans totalling £900m.  At a P/NBV of almost 6 this is value destroying for shareholders; companies should only repurchase their own shares when they are considered to be well below their intrinsic value. 

Pan African disposal amendment

A small South African based precious mining group that produces gold and platinum from high grade ore bodies at a low cash cost.  I have a holding in my growth portfolio (epic code: PAF).

Today Pan African announced an amendment to the disposal conditions of the sale of its Manica mine.  This disposal was initially agreed on 29 August 2012 and amended on 14 December 2012.

In the initial agreement PAF received 25m shares in Auroch Minerals (the acquiring company) and deferred consideration of AUD 2m to be received 18 months after completion.  There were also potential further consideration dependent on future milestones.

This consideration in the initial agreement has now been replaced in whole by the receipt of AUD2m, of which AUD150k will be received on 30 November 2013 and the balance by 1 March 2014.  The balance payment can be extended by a further two months on payment of AUD50k per month, this is not an additional AUD50k per month, but part of the AUD2m.  So there is little benefit in Auroch paying the balance on 1 March.

The shares of Auroch Minerals currently owned by PAF will be returned on receipt of the AUD2m for no consideration.  The shares have a market value of AUD2.625m (£1.496m) and are carried on PAF's books at £1.183m.

I fail to see any benefit to Pan African in agreeing to this, since they were in any case due the AUD2m some months later than now agreed and have given up 25m shares with a market value of £1.5m.

Petrofac contract award

An oil & gas services company providing design and build for oil and gas infrastructures; operates, maintains and manages assets and trains personnel. I have a holding in my growth portfolio (epic code: PFC)

Petrofac today announced a contract award in a 50/50 joint venture with Korean based Daelim Industrial Co Ltd.  It is a 36 month Engineering, Procurement and Construction contract for Oman Oil Refineries and Petroleum Industries Company - a new customer for Petrofac.  The contract value is valued at US$2.1bn, so Petrofac's annualised share is just over 10% of next year's expected turnover.